SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
Commission File No. 1-7797
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PHH Corporation
(Exact name of Registrant as specified in its charter)
Maryland 52-0551284
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification Number)
organization)
6 Sylvan Way
Parsippany, New Jersey 07054
(Address of principal executive (Zip Code)
office)
(973) 428-9700
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if applicable)
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days: Yes [X] No [ ]
The Company meets the conditions set forth in General Instruction H(1)(a) and
(b) of Form 10-Q and is, therefore, filing this Form with the reduced disclosure
format.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PHH Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
(In millions)
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ---------------------
1999 1998 1999 1998
--------- --------- -------- ---------
Net revenues
Service fees:
Mortgage services (net of amortization
of mortgage servicing rights and
interest of $58.5, $53.2, $119.2 and $101.3,
respectively) $ 106.6 $ 94.0 $ 199.8 $ 172.0
Relocation services (net of interest of $5.3,
$6.9, $10.8 and $14.5, respectively) 106.8 110.2 197.7 209.9
--------- --------- --------- ---------
Service fees, net 213.4 204.2 397.5 381.9
Other 1.4 0.3 3.6 0.3
--------- --------- --------- ---------
Net revenues 214.8 204.5 401.1 382.2
--------- --------- --------- ---------
Expenses
Operating 108.2 107.3 210.9 200.6
General and administrative 21.7 26.5 47.0 47.8
Depreciation and amortization 9.2 5.8 17.4 10.7
Merger-related costs and other unusual charges - 5.9 - 9.1
--------- --------- --------- ---------
Total expenses 139.1 145.5 275.3 268.2
--------- --------- --------- ---------
Income from continuing operations before income taxes 75.7 59.0 125.8 114.0
Provision for income taxes 29.6 24.4 48.0 45.9
--------- --------- --------- ---------
Income from continuing operations 46.1 34.6 77.8 68.1
Income from discontinued operations, net of tax 11.6 28.3 33.7 58.7
Gain on sale of discontinued operations, net of tax 871.2 - 871.2 -
--------- --------- --------- ---------
Net income $ 928.9 $ 62.9 $ 982.7 $ 126.8
========= ========= ========= =========
See accompanying notes to consolidated financial statements.
PHH Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(In millions, except share amounts)
June 30, December 31,
1999 1998
------------- -------------
Assets
Cash and cash equivalents $ 1,133.6 $ 281.3
Accounts and notes receivable, net 617.0 457.7
Property and equipment, net 152.6 149.6
Other assets 721.6 256.3
Net assets of discontinued operations - 967.5
------------- -------------
Total assets exclusive of assets under programs 2,624.8 2,112.4
------------- -------------
Assets under management and mortgage programs
Cash (Note 3) 1,614.5 -
Due from Avis Rent A Car, Inc. (Note 3) 30.6 -
Relocation receivables 571.0 659.1
Mortgage loans held for sale 2,160.0 2,416.0
Mortgage servicing rights 835.9 635.7
------------- -------------
5,212.0 3,710.8
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Total assets $ 7,836.8 $ 5,823.2
============= =============
Liabilities and shareholder's equity
Accounts payable and accrued liabilities $ 848.7 $ 707.6
Deferred income 30.3 27.4
------------- -------------
Total liabilities exclusive of liabilities under programs 879.0 735.0
------------- -------------
Liabilities under management and mortgage programs
Debt 4,541.7 3,691.6
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Deferred income taxes 198.3 198.3
------------- -------------
Total liabilities 5,619.0 4,624.9
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Commitments and contingencies
Shareholder's equity
Preferred stock - authorized 3,000,000 shares - -
Common stock, no par value - authorized 75,000,000 shares;
issued and outstanding 1,000 shares 512.1 479.9
Retained earnings 1,707.6 744.9
Accumulated other comprehensive loss (1.9) (26.5)
-------------- --------------
Total shareholder's equity 2,217.8 1,198.3
------------- -------------
Total liabilities and shareholder's equity $ 7,836.8 $ 5,823.2
============= =============
See accompanying notes to consolidated financial statements.
PHH Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
Six Months Ended
June 30,
-------------------------------
1999 1998
------------- -------------
Operating Activities
Net income $ 982.7 $ 126.8
Income from discontinued operations, net of tax (33.7) (58.7)
Gain on sale of discontinued operations, net of tax (871.2) -
Merger-related costs and other unusual charges - 9.1
Payments of merger-related costs and other unusual charge liabilities (2.1) (29.0)
Depreciation and amortization 17.4 10.7
Other, net (103.6) 166.9
-------------- -------------
(10.5) 225.8
Management and mortgage programs:
Depreciation and amortization 58.9 68.7
Origination of mortgage loans (14,519.7) (11,477.0)
Proceeds on sale and payments from mortgage loans
held for sale 14,775.7 10,359.4
------------- -------------
Net cash provided by (used in) operating activities of continuing operations 304.4 (823.1)
------------- --------------
Investing Activities
Additions to property and equipment (34.5) (59.9)
Net proceeds from disposition of fleet segment 1,803.7 -
Other, net (19.3) (5.4)
Management and mortgage programs:
Equity advances on homes under management (3,474.8) (3,293.4)
Repayment on advances on homes under management 3,505.4 3,483.1
Additions to mortgage servicing rights (371.1) (220.4)
Proceeds from sales of mortgage servicing rights 124.3 53.6
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Net cash provided by (used in) investing activities of continuing operations 1,533.7 (42.4)
------------- --------------
Financing Activities
Proceeds received from Parent Company capital contribution - 46.0
Management and mortgage programs:
Proceeds received for debt repayment in connection
with dispostion of fleet segment 3,016.9 -
Proceeds from debt issuance or borrowings 3,042.7 1,620.7
Principal payments on borrowings (4,516.4) (1,002.6)
Net change in short-term borrowings (742.3) 598.6
Net change in fundings to discontinued operations (100.6) (215.9)
-------------- -------------
Net cash provided by financing activities of continuing operations 700.3 1,046.8
------------- -------------
Effect of changes in exchange rates on cash and cash equivalents (40.2) (6.9)
Cash used in discontinued operations (31.4) (120.6)
-------------- --------------
Net increase in cash and cash equivalents 2,466.8 53.8
Cash and cash equivalents, beginning of period 281.3 2.1
------------- -------------
Cash and cash equivalents, end of period $ 2,748.1 $ 55.9
============= =============
See accompanying notes to consolidated financial statements.
PHH Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
PHH Corporation, together with its wholly-owned subsidiaries (the "Company"), is
a leading provider of mortgage and relocation services and is a wholly-owned
subsidiary of Cendant Corporation ("Cendant" or the "Parent Company"). Pursuant
to certain covenant requirements in the indentures under which the Company
issues debt, the Company continues to operate and maintain its status as a
separate public reporting entity, which is the basis under which the
accompanying unaudited consolidated financial statements and notes are
presented. The consolidated balance sheet of the Company as of June 30, 1999,
the consolidated statements of income for the three and six months ended June
30, 1999 and 1998 and the consolidated statements of cash flows for the six
months ended June 30, 1999 and 1998 are unaudited. In the opinion of management,
all adjustments consisting of normal recurring accruals necessary for a fair
presentation of such financial statements are included. The accompanying
unaudited consolidated financial statements of the Company for the three and six
months ended June 30, 1998 set forth herein have been restated to give effect
to: (i) the contribution by Cendant in April 1999 of certain fuel card
subsidiaries to the Company's fleet business segment (the "fleet segment" or
"fleet businesses"); and (ii) the reclassification of the Company's fleet
segment to a discontinued operation pursuant to an agreement, executed on May
22, 1999 which provided for the disposition of the Company's fleet segment (see
Note 3 - Discontinued Operations). The accompanying consolidated financial
statements include the accounts and transactions of the Company and all
wholly-owned subsidiaries. All intercompany balances and transactions have been
eliminated in consolidation. The accompanying unaudited consolidated financial
statements have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instuctions of Form
10-Q and Rule 10-01 of Regulation S-X. The December 31, 1998 consolidated
balance sheet was derived from the Company's audited financial statements
included in the Company's Annual Report on Form 10-K/A for the year ended
December 31, 1998, filed with the Securities and Exchange Commission ("SEC") on
August 16, 1999 and should be read in conjunction therewith. Operating results
for the three and six months ended June 30, 1999 are not necessarily indicative
of the results that may be expected for the year ending December 31, 1999.
Certain reclassifications have been made to the 1998 consolidated
financial statements to conform with the presentation used in 1999.
2. Comprehensive Income
Components of comprehensive income are summarized as follows:
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ -------------------------
(In millions) 1999 1998 1999 1998
--------- --------- --------- ---------
Net income $ 928.9 $ 62.9 $ 982.7 $ 126.8
Other comprehensive income (loss):
Currency translation adjustment 48.4 (6.7) 26.1 (6.7)
Unrealized holding losses on
marketable securities - - (1.5) -
--------- --------- --------- --------
Comprehensive income $ 977.3 $ 56.2 $ 1,007.3 $ 120.1
========= ========= ========= ========
The components of accumulated other comprehensive loss for the six months
ended June 30, 1999 are as follows:
Net unrealized Accumulated
loss on Currency other
marketable translation comprehensive
(In millions) securities adjustment loss
--------------- ----------- -------------
Balance, January 1, 1999 $ - $ (26.5) $ (26.5)
Current period change (1.5) 26.1 24.6
--------------- ----------- -------------
Balance, June 30, 1999 $ (1.5) $ (0.4) $ (1.9)
=============== =========== =============
3. Discontinued Operations
Contribution of Fuel Card Subsidiaries by Parent Company. In April 1999,
the Parent Company contributed its fuel card subsidiaries, Wright Express
Corporation ("WEX") and The Harpur Group, Ltd. ("Harpur"), to the Company.
As both entities were under common control, such transaction has been
accounted for in a manner similar to a pooling of interests. Accordingly,
financial results for the three and six months ended June 30, 1998 have
been restated as if the Company, WEX and Harpur had operated as one entity
since inception. However, the operating results of Harpur are included from
January 20, 1998, the date on which Harpur was acquired by the Parent
Company for $190.7 million pursuant to a purchase business combination and,
accordingly, the date on which common control was established.
Divestiture. On May 22, 1999 (the "Measurement Date"), the Company executed
an agreement with Avis Rent A Car, Inc. ("ARAC") providing for the
disposition of the Company's fleet segment (the "Agreement"), which
included PHH Vehicle Management Services Corporation, WEX, Harpur and other
subsidiaries, to ARAC. The Company's fleet segment primarily consisted of
providing fleet and fuel card related products and services to corporate
clients and government agencies. These services included management and
leasing of vehicles, fuel card payment and reporting and other fee-based
services for clients' vehicle fleets. Vehicles were leased primarily to
corporate fleet users under operating and direct financing lease
arrangements.
On June 30, 1999, the Company completed the divestiture of the fleet
businesses. Pursuant to the Agreement, ARAC acquired the net assets of the
Company's fleet businesses through the assumption and subsequent repayment
of $1.44 billion of intercompany debt of PHH Holdings, a wholly-owned
subsidiary of the Company, and the issuance of $360.0 million in
convertible preferred stock of Avis Fleet Leasing and Management
Corporation ("Avis Fleet"), a wholly-owned subsidiary of ARAC. Coincident
to the closing of the transaction, ARAC refinanced the assumed debt under
management programs which was payable to the Company. Accordingly, on June
30, 1999, the Company received additional consideration from ARAC of
$3,047.5 million comprised of $3,016.9 million of cash proceeds and a $30.6
million note receivable. On such date, the Company used proceeds of
$1,809.4 million to repay outstanding fleet segment financing arrangements.
The remaining proceeds were designated to repay outstanding corporate debt
as it matures (the borrowings of which had been loaned to the fleet segment
to finance the purchases of leased vehicles) and to finance other assets
under management and mortgage programs. Additionally, in July 1999,
utilizing the cash proceeds from the fleet segment disposition, the Company
made a dividend payment to Cendant in the amount of $1,033.0 million. Such
dividend was in compliance with the dividend restriction covenant pursuant
to the Indenture under which the Company issues medium-term notes.
The convertible preferred stock of Avis Fleet is convertible into common
stock of ARAC at the Company's option upon the satisfaction of certain
conditions, including the per share price of ARAC Class A common stock
equaling or exceeding $50 per share and the fleet segment attaining certain
EBITDA (earnings before interest, taxes, depreciation and amortization)
thresholds, as defined. There are additional circumstances upon which the
shares of Avis Fleet convertible preferred stock are automatically or
mandatorily convertible into ARAC common stock. The transaction followed a
competitive bidding process.
In connection with the disposition of the Company's fleet segment, the
Company recorded an after tax gain on sale of discontinued operations of
$871.2 million in the second quarter of 1999, which included income from
operations subsequent to the Measurement Date of $5.5 million. The fleet
segment disposition was structured in accordance with applicable tax law to
be treated as a tax-free reorganization and, accordingly, no tax provision
has been recorded on a majority of the gain. Should the transaction be
deemed taxable, the resultant tax liability could be material.
Summarized financial data of the Company's fleet segment, inclusive of the
fuel card subsidiaries contributed by the Parent Company, is as follows:
Statement of Income
(In millions) Three Months Ended June 30, Six Months Ended June 30,
----------------------------- ----------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
Net revenues $ 66.6 $ 95.7 $ 166.2 $ 192.3
----------- ----------- ----------- -----------
Income before income taxes 21.1 40.0 51.7 83.0
Provision for income taxes 9.5 11.7 18.0 24.3
----------- ----------- ---------- -----------
Net income $ 11.6 $ 28.3 $ 33.7 $ 58.7
=========== =========== =========== ===========
Balance Sheet
(In millions) December 31,
1998
------------
Total assets exclusive of assets under programs $ 893.6
Assets under management programs 3,801.1
Total liabilities exclusive of liabilities under programs (379.4)
Liabilities under management programs (3,347.9)
-----------
Net assets of discontinued operations $ 967.5
===========
The effect on the consolidated financial statements of the restatement
resulting from the Parent Company's contribution of its WEX and Harpur
subsidiaries ("Parent Company Subsidiaries") and the subsequent
reclassification of the fleet segment to a discontinued operation for the
three and six months ended June 30, 1998 is as follows:
Consolidated Statements of Operations
(In millions)
Three Months Ended June 30, 1998
------------------------------------------------------------------
As Contribution of Reclassification
previously Parent Company for discontinued As
reported Subsidiaries operations restated
------------ ---------------- ---------------- ---------
Net revenues $ 276.9 $ 23.3 $ (95.7) $ 204.5
Expenses
Operating 129.1 6.3 (28.1) 107.3
General and administrative 41.3 8.5 (23.3) 26.5
Depreciation and amortization 8.6 2.8 (5.6) 5.8
Merger-related costs and other unusual
charges 4.6 - 1.3 5.9
------------ ---------------- ---------------- ---------
Total expenses 183.6 17.6 (55.7) 145.5
------------ ---------------- ----------------- ---------
Income from continuing operations before
income taxes 93.3 5.7 (40.0) 59.0
Provision of income taxes 33.7 2.4 (11.7) 24.4
------------ ---------------- ----------------- ---------
Income from continuing operations 59.6 3.3 (28.3) 34.6
Income from discontinued operations,
net of tax - - 28.3 28.3
------------ ---------------- ---------------- ---------
Net income $ 59.6 $ 3.3 $ - $ 62.9
============ ================ ================ =========
Six Months Ended June 30, 1998
------------------------------------------------------------------
As Contribution of Reclassification
previously Parent Company for discontinued As
reported Subsidiaries operations restated
------------ ---------------- ---------------- ---------
Net revenues $ 529.9 $ 44.6 $ (192.3) $ 382.2
Expenses
Operating 240.0 15.7 (55.1) 200.6
General and administrative 78.0 14.4 (44.6) 47.8
Depreciation and amortization 16.1 5.5 (10.9) 10.7
Merger-related costs and other unusual
charges 7.8 - 1.3 9.1
------------ ---------------- ---------------- ---------
Total expenses 341.9 35.6 (109.3) 268.2
------------ ---------------- ---------------- ---------
Income from continuing operations before
income taxes 188.0 9.0 (83.0) 114.0
Provision of income taxes 66.3 3.9 (24.3) 45.9
------------ ---------------- ----------------- ---------
Income from continuing operations 121.7 5.1 (58.7) 68.1
Income from discontinued operations,
net of tax - - 58.7 58.7
------------ ---------------- ----------------- ---------
Net income $ 121.7 $ 5.1 $ - $ 126.8
============ ================ ================= =========
4. Merger-Related Costs and Other Unusual Charges
During the three and six months ended June 30, 1998, the Company incurred
net charges of $5.9 million and $9.1 million, respectively, associated with
changes in the estimate of costs to be incurred in connection with 1997
merger-related costs and other unusual charges. The net charge of $9.1
million during the six months ended June 30, 1998 included $24.1 million of
additional future costs related to lease terminations partially offset by
$15.0 million of net credits primarily related to a change in estimated
severance costs.
5. Commitments and Contingencies
Parent Company Litigation. Since the April 1998 announcement by the Parent
Company of the discovery of potential accounting irregularities in the
former business units of CUC International Inc. ("CUC"), more than 70
lawsuits claiming to be class actions, two lawsuits claiming to be brought
derivatively on the Parent Company's behalf and several other lawsuits and
arbitration proceedings have commenced in various courts and other forums
against the Parent Company and other defendants by or on behalf of persons
claiming to have purchased or otherwise acquired securities or options
issued by CUC or Cendant between May 1995 and August 1998. The Court has
has ordered consolidation of many of the actions.
The SEC and the United States Attorney for the District of New Jersey are
conducting investigations relating to the matters referenced above. The SEC
advised the Parent Company that its inquiry should not be construed as an
indication by the SEC or its staff that any violations of law have
occurred. As a result of the findings from the investigations, the Parent
Company made all adjustments considered necessary which are reflected in
its financial statements. The Parent Company does not expect that
additional adjustments will be necessary as a result of these government
investigations.
The Parent Company does not believe it is feasible to predict or determine
the final outcome or resolution of these proceedings or to estimate the
amounts or potential range of loss with respect to these proceedings and
investigations. In addition, the timing of the final resolution of these
proceedings and investigations is uncertain. The possible outcomes or
resolutions of these proceedings and investigations could include
judgements against the Parent Company or settlements and could require
substantial payments by the Parent Company. Management believes that
material adverse outcomes with respect to such Parent Company proceedings
could have a material adverse impact on the financial position or cash
flows of the Company.
Other pending litigation. The Company and its subsidiaries are involved in
pending litigation in the usual course of business. In the opinion of
management, such other litigation will not have a material adverse effect
on the Company's consolidated financial position, results of operations or
cash flows.
6. New Accounting Standards
In October 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 134 "Accounting
for Mortgage-Backed Securities Retained after the Securitization of
Mortgage Loans Held for Sale by a Mortgage Banking Enterprise", which was
effective for the first fiscal quarter after December 15, 1998. The Company
adopted SFAS No. 134 effective January 1, 1999. SFAS No. 134 requires that
after the securitization of mortgage loans, an entity engaged in mortgage
banking activities classify the resulting mortgage-backed securities or
other interests based on its ability and intent to sell or hold those
investments. As of January 1, 1999, the Company reclassified
mortgage-backed securities and other interests retained after the
securitization of mortgage loans from the trading to the available for sale
category. Subsequent to the adoption of SFAS No. 134, such securities and
interests are accounted for in accordance with SFAS No. 115 "Accounting for
Certain Investments in Debt and Equity Securities". The adoption of SFAS
No. 134 did not have a material impact on the financial statements.
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities". The Company will adopt SFAS No. 133
effective January 1, 2001. SFAS No. 133 requires the Company to record all
derivatives in the consolidated balance sheet as either assets or
liabilities measured at fair value. If the derivative does not qualify as a
hedging instrument, the change in the derivative fair values will be
immediately recognized as a gain or loss in earnings. If the derivative
does qualify as a hedging instrument, the gain or loss on the change in the
derivative fair values will either be recognized (i) in earnings as offsets
to the changes in the fair value of the related item being hedged or (ii)
be deferred and recorded as a component of other comprehensive income and
reclassified to earnings in the same period during which the hedged
transactions occur. The Company has not yet determined what impact the
adoption of SFAS No. 133 will have on its financial statements.
7. Segment Information
Management evaluates each segment's performance on a stand-alone basis
based on a modification of earnings before interest, income taxes,
depreciation and amortization. For this purpose, Adjusted EBITDA is defined
as earnings before (i) non-operating interest, (ii) income taxes, and (iii)
depreciation and amortization (exclusive of depreciation and amortization
on assets under management and mortgage programs), adjusted to exclude
items which are of a non-recurring or unusual nature and are not measured
in assessing segment performance or are not segment specific. Interest
expense incurred on indebtedness which is used to finance relocation and
mortgage origination and servicing activities is recorded net within
revenues in the applicable reportable operating segment. The Company
determined that it has two reportable operating segments comprising its
continuing operations based primarily on the types of services it provides,
the consumer base to which marketing efforts are directed and the methods
used to sell services. Inter-segment net revenues were not significant to
the net revenues of any one segment or the consolidated net revenues of the
Company. A description of the services provided within each of the
Company's reportable operating segments is as follows:
Mortgage
Mortgage services primarily include the origination, sale and servicing of
residential mortgage loans. Revenues are earned from the sale of mortgage
loans to investors as well as from fees earned on the servicing of loans
for investors. The Company markets a variety of mortgage products to
consumers through relationships with corporations, affinity groups,
financial institutions, real estate brokerage firms and other mortgage
banks.
Mortgage services customarily sells all mortgages it originates to
investors (which include a variety of institutional investors) either as
individual loans, as mortgage-backed securities or as participation
certificates issued or guaranteed by Fannie Mae, the Federal Home Loan
Mortgage Corporation or the Government National Mortgage Association, while
generally retaining mortgage servicing rights. Mortgage servicing consists
of collecting loan payments, remitting principal and interest payments to
investors, holding escrow funds for payment of mortgage-related expenses
such as taxes and insurance, and otherwise administering the Company's
mortgage loan servicing portfolio.
Relocation
Relocation services are provided to client corporations for the transfer of
their employees. Such services include appraisal, inspection and selling of
transferees' homes and providing equity advances to transferees (generally
guaranteed by the corporate customer). Additional services provided include
certain home management services, assistance in locating a new home at the
transferee's destination, consulting services and other related services.
Segment Information
(In millions) Three Months Ended June 30,
----------------------------------------------------------
1999 1998
------------------------- -------------------------
Adjusted Adjusted
Revenues EBITDA Revenues EBITDA
--------- --------- -------- ----------
Mortgage $ 106.6 $ 49.7 $ 94.0 $ 44.8
Relocation 106.8 34.1 110.2 26.4
Other 1.4 1.1 0.3 (0.5)
--------- --------- -------- -----------
Total $ 214.8 $ 84.9 $ 204.5 $ 70.7
========= ========= ======== ===========
Six Months Ended June 30,
----------------------------------------------------------
1999 1998
------------------------- -------------------------
Adjusted Adjusted
Revenues EBITDA Revenues EBITDA
--------- ---------- --------- ----------
Mortgage $ 199.8 $ 93.7 $ 172.0 $ 82.3
Relocation 197.7 52.0 209.9 52.0
Other 3.6 (2.5) 0.3 (0.5)
--------- ---------- --------- ----------
Total $ 401.1 $ 143.2 $ 382.2 $ 133.8
========= ========== ========= ==========
Provided below is a reconciliation of total Adjusted EBITDA for reportable
segments to consolidated income from continuing operations before income
taxes.
Three Months Ended Six Months Ended
(In millions) June 30, June 30,
--------------------- --------------------
1999 1998 1999 1998
---------- -------- --------- ---------
Adjusted EBITDA for reportable segments $ 84.9 $ 70.7 $ 143.2 $ 133.8
Depreciation and amortization 9.2 5.8 17.4 10.7
Merger-related costs and other unusual charges - 5.9 - 9.1
---------- -------- --------- ---------
Consolidated income from continuing operations
before income taxes $ 75.7 $ 59.0 $ 125.8 $ 114.0
========== ======== ========= =========
Item 2. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS AND LIQUIDITY
AND CAPITAL RESOURCES
We are a leading provider of mortgage and relocation services and a wholly-owned
subsidiary of Cendant Corporation ("Cendant" or the "Parent Company"). Pursuant
to certain covenant requirements in the indentures under which we issue debt, we
continue to operate and maintain our status as a separate public reporting
entity.
On June 30, 1999, pursuant to Cendant's previously announced program to divest
non-strategic businesses and assets, we completed the disposition of our fleet
segment for aggregate consideration of $1.8 billion. The fleet segment has been
classified as a discontinued operation herein and will be presented as such when
we report financial information (See "Discontinued Operations").
Results of Operations - Three Months Ended June 30, 1999
vs.
Three Months Ended June 30, 1998
This discussion should be read in conjunction with the information contained in
our Consolidated Financial Statements and accompanying Notes thereto appearing
elsewhere in this Form 10-Q.
The underlying discussion of each segment's operating results focuses on
Adjusted EBITDA, which is defined as earnings before (i) non-operating interest;
(ii) income taxes and (iii) depreciation and amortization (exclusive of
depreciation and amortization on assets under management and mortgage programs),
adjusted to exclude items which are of a non-recurring or unusual nature and are
not measured in assessing segment performance or are not segment specific. We
believe such discussion is the most informative representation of how our
management evaluates performance. We determined that we have two reportable
operating segments comprising our continuing operations based primarily on the
types of services we provide, the consumer base to which marketing efforts are
directed and the methods we use to sell services. For additional information,
including a description of the services provided in each of our reportable
operating segments, see Note 7 to the consolidated financial statements.
Our consolidated revenues increased $10.3 million (5%) from $204.5 million in
1998 to $214.8 million in 1999. In addition, our Adjusted EBITDA increased $14.2
million (20%) from $70.7 million in 1998 to $84.9 million in 1999. Our Adjusted
EBITDA margin in 1999 was 40%, which represents an increase of five percentage
points over 1998.
Mortgage Segment
Revenues and Adjusted EBITDA increased $12.6 million (13%) and $4.9 million
(11%), respectively, in second quarter 1999 compared to second quarter 1998,
primarily due to substantial growth in mortgage originations and increases in
average servicing fees. The Adjusted EBITDA margin decreased from 48% in 1998 to
47% in 1999 as higher revenues were offset by higher operating expenses related
to increases in headcount, technology and capacity, which we planned to support
continued growth. Mortgage closings increased $1.2 billion (19%) to $7.8
billion, while average production fees decreased 13 basis points, resulting in a
$4.9 million net increase in production revenues. The decrease in the average
fees resulted from a shift to more profitable sales and processing channels
being offset by increased competitive pressures in the mortgage lending market.
The servicing portfolio grew $9.7 billion (29%), and recurring servicing revenue
increased $8.9 million (60%), with average servicing fees increasing one basis
point.
Relocation Segment
Revenues decreased $3.4 million (3%) while Adjusted EBITDA increased $7.7
million (29%) in second quarter 1999 compared to second quarter 1998. The
Adjusted EBITDA margin increased from 24% to 32%. During the second quarter of
1999, we entered into a strategic partnership with a third-party insurance
company, which resulted in $7.2 million of incremental revenues and Adjusted
EBITDA in 1999. In addition, the sale in third quarter 1998 of certain
niche-market asset management operations reduced second quarter 1999 revenues
and Adjusted EBITDA by $4.0 million and $1.8 million, respectively. Also, as a
result of management's efforts to renegotiate certain contracts, ancillary
service fees have increased, offsetting reduced volumes in home sales. Operating
expenses decreased $11.2 million (13%), principally from cost savings in
regional operations, reduced government home sale expenses and the sale of
certain asset management operations discussed above.
Discontinued Operations
Contribution of Fuel Card Subsidiaries by Cendant. Cendant contributed its fuel
card subsidiaries, Wright Express Corporation ("WEX") and The Harpur Group, Ltd.
("Harpur"), to us in April 1999. As both entities were under common control,
such transaction has been accounted for in a manner similar to a pooling of
interests. Accordingly, our financial results for the three and six months ended
June 30, 1998 have been restated as if the Company, WEX and Harpur had operated
as one entity since inception. The operating results of Harpur are included from
January 20, 1998, the date on which Harpur was acquired by Cendant pursuant to a
purchase business combination and, accordingly, when common control was
established.
Divestiture. On June 30, 1999, we completed the disposition of our fleet
segment, which included PHH Vehicle Management Services Corporation, WEX, Harpur
and other subsidiaries, pursuant to an agreement between Avis Rent A Car, Inc.
("ARAC") and us, which was executed on May 22, 1999. Pursuant to the agreement,
ARAC acquired the net assets of our fleet segment through the assumption and
subsequent repayment of $1.44 billion of intercompany debt and the issuance of
$360.0 million of convertible preferred stock of Avis Fleet Leasing and
Management Corporation ("Avis Fleet"), a wholly-owned subsidiary of ARAC.
Coincident to the closing of the transaction, ARAC refinanced the assumed debt
under management programs, which was payable to us. Accordingly, on June 30,
1999, we received additional cash payments and a note receivable from ARAC of
$3,016.9 million and $30.6 million, respectively, which collectively were equal
to the outstanding balances of fleet segment financing arrangements on such
date. We utilized $1,809.4 million of proceeds on June 30 to repay the
outstanding borrowings under the secured financing facilities as well as certain
other secured loans and borrowings under unsecured short-term facilities.
Additionally, in July 1999, we made a dividend payment to Cendant in the amount
of $1,033.0 million. Such dividend was in compliance with the dividend
restriction covenant pursuant to the Indenture under which we issue medium-term
notes (see "Restrictions on Dividends to Cendant"). The remaining proceeds were
designated to repay outstanding corporate debt as it matures (the borrowings of
which had been loaned to the fleet segment to finance the purchases of leased
vehicles) and to finance other assets under management and mortgage programs.
The convertible preferred stock of Avis Fleet is convertible into common stock
of ARAC at our option upon the satisfaction of certain conditions, including the
per share price of ARAC Class A common stock equaling or exceeding $50 per share
and the fleet segment attaining certain EBITDA (earnings before interest, taxes,
depreciation and amortization) thresholds, as defined. There are additional
circumstances upon which the shares of Avis Fleet convertible preferred stock
are automatically or mandatorily convertible into ARAC common stock. If all of
the Avis Fleet convertible preferred stock was converted into common stock of
ARAC, as of the closing date, the Company would have owned approximately 15% of
ARAC's outstanding common equity. The transaction followed a competitive bidding
process. In connection with the disposition of our fleet segment, we recorded an
after-tax gain on sale of discontinued operations of $871.2 million in the
second quarter of 1999. The fleet segment disposition was structured in
accordance with applicable tax law to be treated as a tax-free reorganization
and, accordingly, no tax provision has been recorded on a majority of the gain.
Should the transaction be deemed taxable, the resultant tax liability could be
material.
Fleet segment operations for the full three months ended June 30, 1999,
inclusive of the fuel card subsidiaries contributed by Cendant, generated
revenues of $104.1 million, an increase of $8.4 million (9%). In addition, net
income decreased $11.2 million (40%) quarter over quarter. Contributing to the
revenue increase was a 7% increase in service fee revenue. The number of service
cards and leased vehicles increased by approximately 666,800 (18%) and 12,100
(4%), respectively. Increased operating expenses and higher borrowing costs
contributed to the decrease in net income from second quarter 1998 to second
quarter 1999.
Results of Operations - Six Months Ended June 30, 1999
vs.
Six Months Ended June 30, 1998
Revenues increased $18.9 million (5%) from $382.2 million in 1998 to $401.1
million in 1999. In addition, Adjusted EBITDA increased $9.4 million (7%) from
$133.8 million in 1998 to $143.2 million in 1999. The Adjusted EBITDA margin in
1999 was 36%, which represents an increase of one percentage point over 1998.
Mortgage Segment
Revenues and Adjusted EBITDA increased $27.8 million (16%) and $11.4 million
(14%), respectively, in the first six months of 1999 compared to the first six
months of 1998, primarily due to substantial growth in mortgage originations.
The Adjusted EBITDA margin decreased from 48% in 1998 to 47% in 1999 as higher
revenues were offset by higher operating expenses related to increases in
hiring, technology and capacity, which we planned to support continued growth.
Mortgage closings increased $3.2 billion (28%) to $14.6 billion, while average
production fees decreased 8 basis points, resulting in a $24.3 million net
increase in production revenues. The decrease in the average fees resulted from
the shift to more profitable sales and processing channels being offset by
increased competitive pressures in the mortgage lending market. The servicing
portfolio grew $12.1 billion (37%), with recurring servicing revenue increasing
$5.5 million (18%) and average servicing fees declining one basis point.
Relocation Segment
Revenues decreased $12.2 million (6%) while Adjusted EBITDA remained unchanged
in the first six months of 1999 compared to the first six months of 1998. The
Adjusted EBITDA margin increased from 25% in 1998 to 26% in 1999. The sale in
third quarter 1998 of certain niche-market asset management operations reduced
1999 revenues and Adjusted EBITDA by $9.7 million and $5.8 million,
respectively. In addition, during the second quarter of 1999, we entered into a
strategic partnership with a third party insurance company, which resulted in
$7.2 million of incremental revenues and Adjusted EBITDA. As a result of
management's efforts to renegotiate certain contracts, ancillary service fees
have increased, offsetting reduced volumes in home sales and household goods
moves. In 1998, revenues and Adjusted EBITDA benefited from an improvement in
receivable collections, which permitted a $4.7 million reduction in billing
reserve requirements. Operating expenses, excluding information technology,
decreased $15.0 million, principally from cost savings in regional operations,
reduced government home sale expenses and the sale of certain asset management
operations discussed above. These expense reductions were partially offset by
increased investment in information technology.
Discontinued Operations
Fleet segment operations for the full six months ended June 30, 1999, inclusive
of the fuel card subsidiaries contributed by Cendant, generated revenues of
$203.7 million, an increase of $11.4 million (6%) over the comparable prior year
period. Net income decreased $19.5 million (33%) in the first six months of 1999
compared to the first six months of 1998. Contributing to the revenue increase
was an 8% increase in service fee revenue. The number of service cards and
leased vehicles increased by approximately 614,600 (17%) and 17,400 (5%),
respectively. Increased operating expenses, higher borrowing costs and the
receipt in 1998 of access fees related to a key vendor arrangement contributed
to the decrease in net income from the first six months of 1998 to the first six
months of 1999.
Liquidity and Capital Resources - Continuing Operations
We manage our funding sources to ensure adequate liquidity. The sources of
liquidity fall into three general areas: ongoing liquidation of assets under
management, global capital markets, and committed credit agreements with various
high-quality domestic and international banks. In the ordinary course of
business, the liquidation of assets under management programs, as well as cash
flows generated from operating activities, provide the cash flow necessary for
the repayment of existing liabilities. Financial covenants are designed to
ensure our self-sufficient liquidity status. Financial covenants include
restrictions on dividends and other distributions payable to the Parent Company
and loans to the Parent Company from us, limitations on our ratio of debt to
equity, and certain other separate financial restrictions.
Our exposure to interest rate and liquidity risk is minimized by effectively
matching floating and fixed interest rate and maturity characteristics of
funding to related assets, varying short and long-term domestic and
international funding sources, and securing available credit under committed
banking facilities. Using historical information, we will project the relevant
characteristics of assets under management programs and generally match the
projected dollar amount, interest rate and maturity characteristics of the
assets within the overall funding program. This is accomplished through stated
debt terms or effectively modifying such terms through other instruments,
primarily interest rate swap agreements and revolving credit agreements. In our
relocation business, we project the length of time that a home will be held
before being sold on behalf of the client. Within our mortgage services
business, we fund the mortgage loans on a short-term basis until the mortgage
loans are sold to unrelated investors, which generally occurs within sixty days.
Interest rate risk on mortgages originated for sale is managed through the use
of forward delivery contracts, financial futures and options. Financial
derivatives are also used as a hedge to minimize earnings volatility as it
relates to mortgage servicing assets.
We support originated mortgages and advances under relocation contracts
primarily by issuing commercial paper, medium term notes and by maintaining
securitized obligations. Such financing is included in liabilities under
management and mortgage programs since such debt corresponds directly with high
quality related assets. We continue to pursue opportunities to reduce our
borrowing requirements by securitizing increasing amounts of our high quality
assets. We currently have an agreement, expiring May 2001 under which an
unaffiliated buyer, Bishops Gate Residential Mortgage Trust, a special purpose
entity (the "Buyer") commits to purchase, at our option, mortgage loans
originated by us on a daily basis, up to the Buyer's asset limit of $2.4
billion. Under the terms of this sale agreement, we retain the servicing rights
on the mortgage loans sold to the Buyer and provide the Buyer with the option to
sell or securitize the mortgage loans into the secondary market. At June 30,
1999, we were servicing approximately $1.7 billion of mortgage loans owned by
the Buyer.
Following the May 22, 1999 executed agreement providing for the disposition of
our fleet segment, Fitch IBCA lowered our long-term debt rating from A+ to A and
affirmed our short-term debt rating at F1, and Standard and Poor's Corporation
affirmed our long-term and short-term debt ratings at A-/A2. Also, in connection
with the closing of the transaction, Duff and Phelps Credit Rating Co. lowered
our long-term debt rating from A+ to A and our short-term debt rating was
reaffirmed at D1. Moody's Investor Service lowered our long-term debt rating
from A3 to Baa1 and affirmed our short-term debt rating at P2. (A security
rating is not a recommendation to buy, sell or hold securities and is subject to
revision or withdrawal at any time).
We expect to continue to maximize our access to global capital markets by
maintaining the quality of our assets under management. This is achieved by
establishing credit standards to minimize credit risk and the potential for
losses. Depending upon asset growth and financial market conditions, we utilize
the United States and European commercial paper markets, as well as other
cost-effective short-term instruments. In addition, we will continue to utilize
the public and private debt markets as sources of financing. Augmenting these
sources, we will continue to manage outstanding debt with the potential sale or
transfer of managed assets to third parties while retaining fee-related
servicing responsibility. At June 30, 1999, aggregate borrowings were comprised
of commercial paper, medium-term notes, securitized obligations and other
borrowings of $1.6 billion, $2.0 billion, $0.8 billion, and $0.1 billion,
respectively.
We have an effective shelf registration statement on file with the Securities
and Exchange Commission ("SEC"), providing for the aggregate issuance of up to
$3.0 billion of medium-term note debt securities. These securities may be
offered from time to time, together or separately, based on terms to be
determined at the time of sale. The proceeds will be used to finance assets we
manage for our clients and for general corporate purposes. As of June 30, 1999,
we had approximately $2.0 billion of medium-term notes outstanding under this
shelf registration statement.
Securitized Obligations
We maintain three separate financing facilities for our continuing operations,
the outstanding borrowings of which are securitized by corresponding assets
under management and mortgage programs. Such securitized obligations are
described below.
Mortgage Facility. We maintain a 364-day financing agreement, expiring in
December 1999, to sell mortgage loans under an agreement to repurchase such
mortgages (the "Mortgage Agreement"). The Mortgage Agreement is collateralized
by the underlying mortgage loans held in safekeeping by the custodian to the
Mortgage Agreement. The total commitment under this Mortgage Agreement is $500.0
million and is renewable on an annual basis at the discretion of the lender in
accordance with the securitization agreement. Mortgage loans financed under this
Mortgage Agreement at June 30, 1999 totaled $458.1 million.
Relocation Facilities. We maintain a 364-day asset securitization agreement
expiring in December 1999 under which an unaffiliated buyer has committed to
purchase an interest in the rights to payment related to certain of our
relocation receivables. The revolving purchase commitment provides for funding
up to a limit of $325.0 million and is renewable on an annual basis at the
discretion of the lender in accordance with the securitization agreement. Under
the terms of this agreement, we retain the servicing rights related to the
relocation receivables. At June 30, 1999, we were servicing $248.3 million of
assets which were funded under this agreement.
We also maintain an asset securitization agreement, with a separate unaffiliated
buyer, which has a purchase commitment up to a limit of $350.0 million. The
terms of this agreement are similar to the aforementioned facility, whereby we
retain the servicing rights on the rights of payment related to certain of our
relocation receivables. At June 30, 1999, we were servicing $85.0 million of
assets eligible for purchase under this agreement.
Other Credit Facilities
To provide additional financial flexibility, our current policy is to ensure
that minimum committed facilities aggregate 100 percent of the average
outstanding commercial paper. This policy will be maintained subsequent to the
divestiture of our fleet segment. We maintain $2.65 billion of unsecured
committed credit facilities, which are backed by a consortium of domestic and
foreign banks. The facilities are comprised of $1.25 billion of syndicated lines
of credit maturing in March 2000 and $1.25 billion of syndicated lines of credit
maturing in the year 2002. In addition, we have a $150.0 million revolving
credit facility, which matures in December 1999, and other uncommitted lines of
credit with various financial institutions, which were unused at June 30, 1999.
We closely evaluate not only the credit of the banks, but also the terms of the
various agreements to ensure ongoing availability. We believe that our current
policy provides adequate protection should volatility in the financial markets
limit our access to commercial paper or medium-term notes funding. We
continually seek additional sources of liquidity to accommodate asset growth and
to provide further protection from volatility in the financial markets.
Restrictions on Dividends to Cendant
Pursuant to a covenant in our Indenture with The First National Bank of Chicago,
as trustee, relating to our medium-term notes, we are restricted from paying
dividends, making distributions, or making loans to Cendant to the extent that
such payments are collectively in excess of 40% of our consolidated net income
(as defined in the covenant) for each fiscal year, provided however, that we can
distribute to Cendant 100% of any extraordinary gains from asset sales and
capital contributions previously made to us by Cendant. Notwithstanding the
foregoing, we are prohibited under such covenant from paying dividends or making
loans to Cendant if upon giving effect to such dividends and/or loan, our debt
to equity ratio exceeds 8 to 1, at the time of the dividend or loan, as the case
may be.
Liquidity and Capital Resources - Discontinued Operations
The purchases of leased vehicles have principally been supported by our issuance
of commercial paper and medium-term notes, coincident with financing our other
assets under management and mortgage programs, and by the fleet segment
maintaining secured financing facilities. Proceeds from public debt issuances
have historically been loaned to the fleet segment, pursuant to Parent Company
loan agreements, consistent with the funding requirements necessary for the
purchases of leased vehicles.
Cash Flows
We generated $304.4 million of cash flows from operations during the six months
ended June 30, 1999 representing a $1.1 billion increase from the six months
ended June 30, 1998. The increase in cash flows from operations was primarily
due to a $1.4 billion net reduction in mortgage loans held for sale which
reflects larger loan sales to secondary markets in proportion to loan
originations.
We generated $1.5 billion in cash flows from investing activities during the six
months ended June 30, 1999 representing a $1.6 billion increase from the six
months ended June 30, 1998. The incremental cash flows from investing activities
was primarily attributable to net cash proceeds of $1.8 billion received in
connection with our fleet segment disposition partially offset by incremental
net investments in assets under management and mortgage programs of $239.1
million.
Net cash provided by financing activities decreased $346.5 million in 1999 over
1998 primarily due to net repayments on fundings for our investments in assets
under management and mortgage programs.
Litigation
Since the April 1998 announcement by our Parent Company of the discovery of
potential accounting irregularities in the former business units of CUC
International Inc. ("CUC"), more than 70 lawsuits claiming to be class actions,
two lawsuits claiming to be brought derivatively on the Parent Company's behalf
and several other lawsuits and arbitration proceedings have commenced in various
courts and other forums against the Parent Company and other defendants by or on
behalf of persons claiming to have purchased or otherwise acquired ecurities or
options issued by CUC or Cendant between May 1995 and August 1998. The Court has
ordered consolidation of many of the actions.
The SEC and the United States Attorney for the District of New Jersey are
conducting investigations relating to the matters referenced above. The SEC
advised the Parent Company that its inquiry should not be construed as an
indication by the SEC or its staff that any violations of law have occurred. As
a result of the findings from the investigations, the Parent Company made all
adjustments considered necessary which are reflected in its financial
statements. The Parent Company does not expect that additional adjustments will
be necessary as a result of these government investigations.
The Parent Company does not believe that it is feasible to predict or determine
the final outcome of these proceedings or investigations or to estimate the
amount or potential range of loss with respect to these proceedings or
investigations. In addition, the timing of the final resolution of these
proceedings and investigations is uncertain. The possible outcomes or
resolutions of the proceedings and investigations could include judgements
against the Parent Company or settlements and could require substantial payments
by the Parent Company. In addition, the timing of the final resolution of the
proceedings or investigations is uncertain. We believe that material adverse
outcomes with respect to such Parent Company proceedings could have a material
adverse impact on our financial condition and cash flows.
Impact of New Accounting Pronouncements
In October 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 134 "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise", effective for the first fiscal
quarter after December 15, 1998. We adopted SFAS No. 134 effective January 1,
1999. SFAS No. 134 requires that after the securitization of mortgage loans, an
entity engaged in mortgage banking activities classify the resulting
mortgage-backed securities or other interests based on its ability and intent to
sell or hold those investments. As of January 1, 1999, we reclassified
mortgage-backed securities and other interests retained after the securitization
of mortgage loans from the trading to the available for sale category.
Subsequent to the adoption of SFAS No. 134, such securities and interests are
accounted for in accordance with SFAS No. 115 "Accounting for Certain
Investments in Debt and Equity Securities". The adoption of SFAS No. 134 did not
have a material impact on our financial statements.
The FASB issued SFAS No. 133 "Accounting for Derivative Instruments and Hedging
Activities". We will adopt SFAS No. 133 effective January 1, 2001. SFAS No. 133
requires us to record all derivatives in the consolidated balance sheet as
either assets or liabilities measured at fair value. If the derivative does not
qualify as a hedging instrument, the change in the derivative fair values will
be immediately recognized as a gain or loss in earnings. If the derivative does
qualify as a hedging instrument, the gain or loss on the change in the
derivative fair values will either be recognized (i) in earnings as offsets to
the changes in the fair value of the related item being hedged or (ii) be
deferred and recorded as a component of other comprehensive income and
reclassified to earnings in the same period during which the hedged transactions
occur. We have not yet determined what impact the adoption of SFAS No. 133 will
have on our financial statements.
Year 2000 Compliance
The following disclosure is a Year 2000 readiness disclosure statement pursuant
to the Year 2000 Readiness and Disclosure Act.
The Year 2000 presents the risk that information systems will be unable to
recognize and process date-sensitive information properly from and after January
1, 2000. To minimize or eliminate the effect of the Year 2000 risk on our
business systems and applications, we are continually identifying, evaluating,
implementing and testing changes to our computer systems, applications and
software necessary to achieve Year 2000 compliance. We selected a team of
managers to identify, evaluate and implement a plan to bring all of our critical
business systems and applications into Year 2000 compliance prior to December
31, 1999. The Year 2000 initiative consists of four phases: (i) identification
of all critical business systems subject to Year 2000 risk (the "Identification
Phase"); (ii) assessment of such business systems and applications to determine
the method of correcting any Year 2000 problems (the "Assessment Phase"); (iii)
implementing the corrective measures (the "Implementation Phase"); and (iv)
testing and maintaining system compliance (the "Testing Phase"). We have
substantially completed the Identification and Assessment Phases and have
identified and assessed five areas of risk: (i) internally developed business
applications; (ii) third party vendor software, such as business applications,
operating systems and special function software; (iii) computer hardware
components; (iv) electronic data transfer systems between our customer and us;
and (v) embedded systems, such as phone switches, check writers and alarm
systems. Although no assurance can be made, we believe that substantially all of
our systems, applications and related software that are subject to Year 2000
compliance risk have been identified and that we have either implemented or
initiated the implementation of a plan to correct such systems that are not Year
2000 compliant. In addition, as part of our assessment process we are developing
contingency plans as considered necessary. Substantially all of our mission
critical systems have been remediated during 1998. However, we cannot directly
control the timing of certain Year 2000 compliant vendor products and in certain
situations, exceptions to the December 1998 date have been authorized. We are
closely monitoring those situations and intend to complete testing efforts and
any contingency implementation efforts prior to December 31, 1999. Although we
have begun the Testing Phase, we do not anticipate completion of the Testing
Phase until sometime prior to December 1999.
We rely on third party service providers for services such as
telecommunications, internet service, utilities, components for our embedded and
other systems and other key services. Interruption of those services due to Year
2000 issues could have a material adverse impact on our operations. We initiated
an evaluation of the status of such third party service providers' efforts to
determine alternative and contingency requirements. While approaches to reducing
risks of interruption of business operations vary by business unit, options
include identification of alternative service providers available to provide
such services if a service provider fails to become Year 2000 compliant within
an acceptable timeframe prior to December 31, 1999.
The total cost of our Year 2000 compliance plan is anticipated to be $8.5
million. Approximately $7.6 million of these costs had been incurred through
June 30, 1999 and we expect to incur the balance of such costs to complete the
compliance plan. We are expensing and capitalizing the costs to complete the
compliance plan in accordance with appropriate accounting policies. Variations
from anticipated expenditures and the effect on our future results of operations
are not anticipated to be material in any given year. However, if Year 2000
modifications and conversions are not made, including modifications by our third
party service providers, or are not completed in time, the Year 2000 problem
could have a material impact on our operations, cash flows and financial
condition. At this time, we believe the most likely "worst case" scenario
involves potential disruptions in our operations as a result of the failure of
services provided by third parties.
The estimates and conclusions herein are forward-looking statements and are
based on our best estimates of future events. Risks of completing the plan
include the availability of resources, the ability to discover and correct the
potential Year 2000 sensitive problems which could have a serious impact on
certain operations and the ability of our service providers to bring their
systems into Year 2000 compliance.
Forward-Looking Statements
We make statements about our future results in this quarterly report that may
constitute "forward-looking" statements within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements are based on our
current expectations and the current economic environment. We caution you that
these statements are not guarantees of future performance. They involve a number
of risks and uncertainties that are difficult to predict. Our actual results
could differ materially from those expressed or implied in the forward-looking
statements. Important assumptions and other important factors that could cause
our actual results to differ materially from those in the forward-looking
statements, include, but are not limited to:
o The resolution or outcome of the pending litigation and government
investigations relating to the previously announced accounting
irregularities at the Parent Company;
o Our ability to develop and implement operational and financial systems to
manage rapidly growing operations;
o Competition in our existing and potential future lines of business;
o Our ability to obtain financing on acceptable terms to finance our growth
strategy and for us to operate within the limitations imposed by financing
arrangements; and
o Our ability and our vendors' and customers' ability to complete the
necessary actions to achieve a Year 2000 conversion for computer systems
and applications.
We derive the forward-looking statements in this quarterly report from the
foregoing factors and from other factors and assumptions, and the failure of
such assumptions to be realized as well as other factors may also cause actual
results to differ materially from those projected. We assume no obligation to
publicly correct or update these forward-looking statements to reflect actual
results, changes in assumptions or changes in other factors affecting such
forward-looking statements or if we later become aware that they are not likely
to be achieved.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
In normal operations, we must consider the effects of changes in interest rates.
The following discussion presents an overview of how such changes are managed
and a view of their potential effects.
We use various financial instruments, particularly interest rate swaps, futures,
options and floors to manage our respective interest rate risks. We are
exclusively an end user of these instruments, which are commonly referred to as
derivatives. Established practices require that derivative financial instruments
relate to specific asset, liability or equity transactions.
The SEC requires that registrants include information about potential effects of
changes in interest rates on their financial statements. Although the rules
offer alternatives for presenting this information, none of the alternatives is
without limitation. The following discussion is based on so-called "shock
tests", which model effects of interest rate shifts on the reporting company.
Shock tests, while probably the most meaningful analysis permitted, are
constrained by several factors, including the necessity to conduct the analysis
based on a single point in time and by their inability to include the complex
market reactions that normally would arise from the market shifts modeled. While
the following results of shock tests for interest rate shifts may have some
limited use as benchmarks, they should not be viewed as forecasts.
One means of assessing exposure to interest rate changes is a duration-based
analysis that measures the potential loss in net earnings resulting from a
hypothetical 10% change in interest rates across all maturities (sometimes
referred to as a "parallel shift in the yield curve"). Under this model, it is
estimated that, all else constant, such an increase, including repricing effects
in the securities portfolio, would not materially effect our 1999 net earnings
based on current positions.
PART II
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 12 - Computation of ratio of earnings to fixed charges
Exhibit 27 - Financial data schedule (for electronic transmission only)
(b) Reports on Form 8-K
Form 8-K, dated May 26, 1999, reporting in Item 5 our merger agreement
with PHH Holdings Corporation and Avis Rent A Car, Inc. providing for
the divestiture of our fleet segment.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly cause this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
PHH CORPORATION
By: /s/ David M. Johnson
David M. Johnson
Senior Executive Vice President and
Chief Financial Officer
By: /s/ Jon F. Danski
Jon F. Danski
Executive Vice President, Finance
(Principal Accounting Officer)
Date: August 16, 1999